a hammer representing how subcontractors can impact your workers comp rates

How Hiring Subcontractors Can Impact Your Workers’ Comp Coverage

Businesses need to use extra caution when they hire subcontractors to perform work on behalf of their company. Companies may assume that their contractor has proper insurance to protect their employees, but this isn’t always the case.

Unfortunately, your business is at risk when a sub-contractor does not protect their employees. It is important you ask for proof of workers’ compensation coverage and verify its validity.

Complacency Can Be Costly

Many companies rely on the same core contractors to handle their needs. You may have trusted plumbers, electricians, painters, or other workers that you’ve worked with for years. It can seem redundant to continually ask for certificates of insurance, but complacency can be very costly.

Workers’ compensation insurance does not cover independent contractors doing work for you. Contractors must carry their own policy to protect their employees. If a general contractor oversees the work site, their policy covers injuries to subcontracted employees, even retroactively, based on the hours they worked.

If a contractor or subcontractor does not have workers’ compensation coverage and a worker is injured, your business picks up the costs and they can be substantial.

Certificates Are Critical During Audits

During tight economic times, it’s not unusual for companies to move W-2 employees to 1099 status. It reduces paperwork and expenses, including insurance premiums. This is all well and good, unless the employee does not take out insurance.

Physical audits are very common today, especially if your premiums exceed $10,000 annually. Less than that, you may still undergo a paper audit. If your business undergoes an audit, the auditor will ask for very detailed information. This includes the payments you made to independent contractors, the certificate of insurance for each one, and the 1099 forms.

If you hired a contractor without evidence of workers’ compensation insurance, the auditor will charge you an additional premium for that contractor’s insurance coverage. The amount levied depends of the work performed and the premium may apply to some or all the work.

If a contractor injures themselves you could end up paying their medical bills and lost wages. Uninsured subcontractors can have a significant impact on your loss history and future workers’ compensation rates, too.

You Put Your Coverage At Risk

Hiring uninsured contractors also causes negative repercussions with your insurance company. They’ll issue a retroactive premium bill for contractor coverage for the time they worked with you without protection and they may drop you as a client. The insurance company agreed to cover your business, not the contractor. They know nothing about their safety record or their claims history, and they expect you to do your due diligence.

If your insurer drops you, your business might end up on a blacklist. You may struggle to find a new insurer and you’ll likely pay higher premiums. There are also some situations where your company could be held liable for injuries to an independent contractor’s employees.

Check Certificate Validity

It is always wise to include a clause in your contractor agreement that stipulates that the contractor must have insurance and must provide written notice if they cancel their policy.

Ask the contractor for a copy of their Certificate of General Liability Insurance and their Certificate of Workers’ Compensation Insurance – then call the insurance companies. Some contractors allow their coverage to lapse and if you’re audited, you’ll pay. You can try to recoup the money from the contractor, but why let it get to that point?

If you’re unclear whether a worker is an employee or independent contractor, use the IRS 20 Factor Test to clarify matters.

Proper general liability and workers’ compensation insurance coverage is crucial to protect your business. If you have questions or concerns, ask an expert. We’re happy to clarify grey areas and we can tailor your policies to meet the needs of your business.